Tuesday, December 25, 2018

Australia, we need to talk... [Apologies to Waleed Aly]

The results of the 2013 election need to be explained:

How could the Liberal/National Party win when some of its major policies weren't costed, as required by it's own legislation? Especially as each policy by itself had previously helped them to decisively lose an election.

How did not just one, but three, major policies of the Liberal-National Coalition (LNP) not get costed by the PBO (Parliamentary Budget Office) under the rules of Howard's "Charter of Budget Honesty".

It gets worse, there have since been two independent audits into the operations of the PBO, and the failure to cost all major party policies before and after the 2013 election is ignored.

Direct Action - an abandoned plan to pay major polluters for their carbon emissions.

NBN, National Broadband Network.

This blog is about the NBN, so that's the focus for the rest of this piece.

What does a National Broadband Network Cost?

That failure to release costings just the tip of the "iceberg" for electoral irregularities in 2013.
There's a more subtle question about the lack of PBO costings for the NBN:

Given that until the 'caretaker period' any member or Party could've requested the PBO to cost each Policy, why wasn't that done? The Greens or the ALP could've handed Turnbull's spreadsheet to the PBO and asked for its Fiscal Impact, yet both failed to.

The PBO at the time refused to cost either NBN Policy, given "it would cost millions" (and many months to model the whole economy & the impact of broadband for years).

Which was only half-true: only Turnbull was putting up a 'Policy', in a simple spreadsheet.
The ALP had implemented their policy and the company building the NBN had a detailed & fully costed Corporate Plan, with good Risk Management and Contingencies. The whole of the PBO examination of the ALP policy would've been to calculate the Fiscal Impact, barely a two person-day task.

In 2016, a new head of PBO quietly released a slim Report that completely demolished all Turnbull's claims from 2013 onwards on what the NBN "Cost".
The Fiscal Impact, or "On Budget" cost, of the NBN was overwhelmingly the extra cost of interest paid by the Government on 10-year bonds it issued.

This gave the lie to the 2013 PBO assertion of needing to do complex economic modelling to compare the two Policies, both of which made a profit in the end, but didn't counter their argument that they didn't have the expertise to evaluate the technical dimensions of either Policy.

Given that the Department of Communications and NBN had sufficient skill, knowledge and resources to perform a detailed assessment of the Turnbull policy, why didn't the PBO request their help? There was never a need for additionals review the NBN Corporate Plan - it had been throughly tested and reviewed by multiple experts, including independent consultants.

The only valid comparison in 2013 of the ALP & LNP NBN Policies was in 'Fiscal Impact', and that was always "how much more interest on Bonds will it cost"?

The Equity contribution difference was $900M, ie. ALP $30.4B vs LNP $29.5B.
At the then prevailing 4% bond yields, now 2.4%, the Fiscal Impact of the Turnbull NBN Policy was $36M / year, now $21M/yr.

Over how many years? Not very many for fibre, but possibly forever for Turnbull's 2013 plan.
The Full Fibre plan was due to be 'cash flow positive' in 2019 (revenues exceeding expenses) and by 2025/6 be "Levered Cash Flow" positive - paying back interest and covering depreciation.

As we know now, the Turnbull-MTM is struggling technically and financially 5 years on.
In 2013, Turnbull was suggesting his NBN Policy would return (an IRR) under 1% for the FTTN/B/C and HFC technologies. Which is odd, as we later discovered that in failing to return more than it cost, the Bond Yield, any government enterprise had to be "On Budget" - to be accounted for as an expense, not investment, in the Budget.

This is why the MTM's 3%-3.5% IRR is so important. If the anticipated return falls too low, all the money invested, and "off-budget", will become an expense and added to the Deficit.

Incredibly, it was the only Coalition policy released before the September election campaign. Nobody in the media has commented on this inconsistency then or since.

In 2013, Conroy, then Minister for Communications, knew all this. He'd even raised the matter in the Senate. When I approached ministerial aides on exactly this question, I was told "Conroy has already raised the matter in the Senate".

I'm sure Turnbull would've been laughed out of every interview if Conroy had made public the full, personal cost difference between the two NBN proposals:
under $25-$50 per household, over the entire life of the NBN.

More simply, a Full Fibre NBN could've been delivered on time and on budget for $1-$2 per household per year. I've yet to meet anyone who'd not have accepted that price.

The minister and his aides knew this from the answer they gave me.
I'd expect DBCDE, Department of Broadband, Communications and the Digital Economy, would've known this simple difference, as would've all the NBN Board and Executive.

So why did Conroy, and after him the other ALP Communications Ministers, not give the public this simple explanation, then or ever since?

Benefit / Cost Analysis anyone?

A large part of the LNP & News Ltd campaign against Labor's Full-Fibre NBN, was howling for a "CBA" - a Cost / Benefit Analysis. A way to gauge the ratio of economic returns for each dollar of public money invested. Typically quoted as "$1.25 for each $1 invested".

Which, again, could've been dismissed out of hand by the ALP, because it was irrelevant & unnecessary: businesses simply don't need, or do, CBA's, especially when they've already embarked on a project.
CBA's are only used before starting a project, to assist in decision making.
The only valid assessment of a commercial project underway is NPV, Net Present Value.

There was a well developed Business Plan for the NBN, with detailed costings and conservative revenue forecasts, with an acceptable Internal Rate of Return (IRR), above CPI (Inflation rate) and Government Bond Yield.

The ALP already knew that a full-fibre NBN would quickly break-even and return a healthy profit, why would they need to estimate that again, when there'd be a profit, not a cost?

CBA's, as shown by the Vertigan / Ergas "Strategic Review", are an Economic forecasting / estimation tool, with many assumptions and a wide degree of uncertainty, that help Governments decide if the non-monetary benefits of a project outweigh the costs of a public expenditure, such as on public roads, hospitals or schools.

In late 2013, I wrote to Ergas asking him to explain how a zero-cost enterprise (i.e. profit making) could have anything but an infinite Benefit / Cost ratio.
It's trivial maths: divide anything by zero and you get infinity.
Ergas never responded to my note and this mathematical fundamental was simply ignored in the "Strategic Review".

Given that Turnbull himself, on multiple occasions, stated approximately "The Laws of Mathematics do not trump the Laws of Australia", it is small wonder that Ergas would ignore them as well.

For-Profit businesses, like NBN Co, do not and need not, perform "CBA's".
Firstly, they're unable to monetise the benefits third parties make from their goods & services,
and secondly, they intend to make a profit on their projects. The hint in is in the name, "For Profit".

If this LNP policy was put up in the 1980's against Paul Keating, he'd have ripped Turnbull to shreds within minutes, then roasted & lambasted Turnbull for months or years over his incompetence and stupidity.

How Fast do you want your Broadband to go?

Turnbull, then later his new NBN Board and Vertigan / Ergas in their "Strategic Review", perpetrated one of the nastiest swindles ever on the Australian public.

Turnbull conflated the initial maximum Fibre offering, 100Mbps, with the raw speed (10x faster) of Full Fibre "GPON", Gigabit Passive Optical Networking.
This was a deliberate misdirect, propagating a fallacy.

Somehow in the minds of Turnbull et al, 100Mbps is the same as ten times that rate, 1Gbps.
The 2013 NBN policy offerings were never "Apples and Apples", though Turnbull has sold this myth ever since.

Notably, both the 2013 "better broadband" spreadsheet and current MTM Corporate Plans do not include upgrading the Turnbull's Old Copper Network to the same access rate as GPON: 1Gbps.
This additional upgrade is necessary for a side-by-side financial comparison of Full Fibre and MTM.

No affordable copper technology, using existing low-quality voice-grade wire, exists to do this over the distances FTTN nodes operate at, hence FTTdp a.k.a. FTTC, which isn't G.fast, but still VDSL2, in Australia.

The HFC rollout is stalled and generating huge delays and losses. None of the claims & promises about it have ever been kept, there's no reason to think any will be in the future.
Anybody crying "but DOCSIS 3.1", which is notionally shared 1Gbps, is seriously deluded based on the inability to bring the Telstra HFC into wide service and the abandoning of Optus HFC.

While very few people in 2013 saw a need for themselves, or niche customers, for Gigabit services, the NBN Policies, to be equivalent, had to end up at the same point: all fixed line services to be 1Gbps-capable.

It's really easy to be "cheaper" if you simply ignore the requirements and deliver a massively sub-par product.
It's like being sold a flash car and then being asked "Would you like an engine in that? And brakes, wheels, tyres, transmission, electrics, computers and a petrol tank? Perhaps a windscreen & windows? Seats and instruments? Any safety equipment too?"

Turnbull's MTM is attempting to rollout 100Mbps and still failing badly at that.
Consider that every promise Turnbull made in 2013 on time to deliver faster services has been broken and it might make sense that NBN Co is effectively adopting 50Mbps as its main service offering.

We can only guess at the outrageous cost an upgrade of the MTM to 1Gbps will be.
Small wonder Turnbull has never addressed this upgrade question with any precision or accountable figures.

Turnbull has relied on vague, hand-waving rhetoric along the lines of "something magical & new will be invented that will make broadband very cheap, so why don't we all wait for these new magic devices and save a tonne of money?".

Magical thinking as a political policy?
How did Turnbull not get challenged and pilloried over that?
I'm sure the Board of any top-50 ASX company would laugh an argument like that out of the room in ten seconds flat.

The "Big New Thing" had been invented at the time and it was Full Fibre.

Not just 1Gbps was possible with off-the-shelf commercial hardware, but several hundred times faster than that: it even forms the basis of the distribution and transit networks of NBN Co, so the new MTM folk knew what was available in 2013 and walked away from it.

Do you want your NBN Co to make money?

Turnbull attacked the Full Fibre NBN for making money.

This is more than brazen huckstery and monumental stupidity, it's truly bizarre: attacking a For-Profit business for charging for its services, for making revenue from customers.

A direct quote from his website:

By contrast, under Labor's NBN wholesale charges per user will triple by 2021.

Turnbull whipped opponents to Full Fibre up into a frenzy by using the forecast 2021 "ARPU" figure of $100/user/month as somehow charging each and every customer that much, which it clearly is anything but correct.

The ARPU, Average Revenue Per User, is an industry standard that allows comparisons across markets and in businesses with changing (growing) numbers of users as well.

ARPU is the "Average" of Total Revenue divided Total Users, absolutely unrelated to any "Average User" in the same way Sydney & Melbourne "Average House Prices" have nothing to do with how much most people pay for a dwelling. The more relevant "Median House Price" is used, the price 50% of buyers pay.

Some high-end users, very willingly, would be paying 10-times that much for 1Gbps and 10,000GB download, while the median user would be paying around $40/mth wholesale.

It's exactly the same as "Average Speed on a Road" over city streets, which might be 35kph.
In Peak Hour congestion, cars may be lucky to do 10kph, while overnight, they'll do the speed limit, 60kph, 80kph, even 110kph.

By comparison, the "break-even" ARPU of the MTM is $52/user/month wholesale, expected in 2020, up from the $42-$44 its been stuck at for the last several years.

In 2013 to 2015, ARPU increased from $37 to $40, after vociferous complaining from Telstra and others that "NBN prices are too high" and CVC [GB/mth] prices being dropped with bundled AVC+CVC services for 50Mbps introduced.

In two years time, again by the application of copious pixie magic dust, the Coalition want us to believe that their MTM will suddenly increase revenue by ~20%, a feat it hasn't achieved in 5 years.

I've always been amazed at the chutzpah of Turnbull in turning what he knew to a Very Good Thing for business, high revenue, into a negative.
I've often wondered if his convicted drug taking aide, Ellis, helped dream up any of these pitches during one of his benders. They're so disconnected with reality, an explanation is required.

Though I've been more amazed at Labor's inability to address that claim, or to even show up Turnbull's insane arguments against business profitability.

Just when did the Liberal-National Coalition reverse their policy of "demolish NBN"?

However, there's never been a headline reporting the unwinding of that policy.
Whoever argues, "but they did, they embraced a cheaper version", hasn't been following along.

It was always going to be a stretch for a usable, profitable NBN to be run under a Political Party trenchantly and vehemently opposed to any universal NBN funded by the Government, versus their magical mantra: "The Private Sector will Provide".

Where's Labor's talking points on this? Complete silence in the places I get news.

There's a deep history of the Coalition opposing Broadband in any form. Howard presided over more than a decade of dogged resistance and sabotage to any initiative allowing fast Broadband. IIRC, the LNP hosted over a dozen reviews and a handful of expensive, unproductive initiatives to deliver regional broadband. Their final waste of money, OPEL, was abandoned by the incoming Rudd government.

Turnbull and Abbott were publicly committed to demolishing the Full Fibre NBN and worked towards that goal for years and, we're told, stopped abruptly without explanation.

Somehow in 2013, Turnbull convinced the whole of the Conservative side of politics, that "NBN is Good", without ever changing their long-running, well advertised anti-NBN policy platform. "Inconceivable" is the word that springs to mind.

Look at the financial and technical mess that Turnbull, with his new board, CEO and executives, has created with the MTM and you might be pardoned for thinking "Demolish the NBN" is still the LNP policy.

Turnbull would've found it far easier to "Convert" his conservative brethren in the Coalition by saying, "play along with me, I'll sink this NBN deeper and faster than the Titanic - and then we can blame it all on the ALP for being 'bad economic managers'. Bonus!".

All the evidence points to this ploy, not against it. Again, the ALP are silent.

You can't get there from here.

One of Turnbull's 2013 campaign comments was: "We wouldn't have started from here".
Which wasn't simply a flat out lie, but a gross distortion of the truth.

Turnbull was in Howard's cabinet in 2007 when they decided to sell Telstra (T3) as a fully vertically integrated business. Turnbull himself deliberately and intentionally created the market failure that was an uncooperative Telstra at war with the Coalition government.

In 2005, Sol Trujillo as the new Telstra CEO, had pitched John Howard in their first meeting that for Telstra to survive, it needed to embark on an NBN (yes, that exact phrase). He wanted the Government, awash with mining royalties, to contribute to his "5 capitals" NBN. Howard didn't just reject the offer, he stormed out of the meeting, setting the tone for the rest of Sol's stewardship of Telstra.

The only reason the ALP had to create another Government Telco in 2009, was because Turnbull had sold the last one off. All those "existing assets" Turnbull wanted to reuse in 2013, had been sold, by him, in 2007 as not worth keeping. Copper wires and connectors don't improve with age, so why would any good business person buy-back an ageing asset they'd disposed of?

To make matters worse, Howard et al didn't do the one thing that everybody at the time was clamouring for: "Structural Separation".

Turnbull and his witticisms ('I wouldn't start from here') were exactly the opposite of the truth: the LNP had deliberately created an awful mess of Australian Telecommunications and the ALP was cleaning up their mess.

In "Wired Brown Land", Paul Fletcher, a one-time Optus executive later Parliamentary Secretary to Turnbull in Communications, described Telstra as "a Monster". This is a matter of public record.

Yet somehow, Turnbull was going to sweet-talk this "Monster" into selling back the copper assets he'd thrown out and now had to reacquire at any price to implement his MTM.

These negotiations took years, yet somehow cost NBN Co "not a penny more".
In what fantasy land could that be true? How could two years of hard negotiation not change anything? It's entirely disingenuous and misleading to suggest the deal was "same same".

Yet, with the deal sealed away from public scrutiny via "commercial in confidence" (protecting whose interests?), we can only guess what Turnbull et al gave away to Telstra.

Not only did Turnbull side-step multiple issues, he blamed the ALP for cleaning up his mess.

Again, the ALP are silent.

What do you think of as "Cheaper"?What does Turnbull and the Coalition mean by "least cost"?

Another of Turnbull's misdirects & lies is his use of "Cheaper", or to use his exact phrase from 2013, "least cost to taxpayers" [see extract of Stmt of Expectations, 2014, below].

Refer back to Turnbull's claims of "the Cost" of the NBN being "Billions", as if it was a Budget line-item expense, the same as roads, hospitals, schools, defence and pensions.There is no Budget line item for "NBN", there never has been, because it's meant to make a profit, it's an investment.
In the same way that ordinary households don't confuse expenses, spending money at the supermarket, with investing in shares or a house, the distinction is simple and very, very clear.

So what does Turnbull mean by "least cost to taxpayers" when the Government isn't spending the money, but investing it to return a profit?
It's a version of my question to Ergas: how does something that makes a profit, be counted as a cost?

The answer is another conflation, the difference between "Capital Expenditure" (CapEx) and "Peak Funding".
In large projects, there's usually a delay between when Capitalised items (assets) are installed and when they turn a profit. "Break-even" is when the asset just covers it's Operational Expenses (OpEx).

During this period, the asset is making a loss, operating expenses are higher than revenues.
These accumulated losses are the gap between CapEx and Peak Funding.
The longer it takes for individual assets to "break-even", the higher the losses and higher Peak Funding will be.
This is why the MTM needs to hit hit it's $52 ARPU "break even" in 2020.
While the Full Fibre plan had it hitting break even (positive EBITDA) around now.

Turnbull has flip-flopped between quoting CapEx and Peak Funding figures, to suit his argument.

The way Turnbull and the NBN Board & CEO have been interpreting the formal Statement of Expectations, "least cost to taxpayers", is deceptive, simplistic and unhelpful: Capital Expenditure.

I'd expect the Ordinary Reasonable Reader would interpret "least cost" to refer to the same headline figure that Turnbull and the NBN Annual Report uses, Peak Funding.

This is the $46B-$51B figure quoted by them.

The NBN Corporate Plan quotes "CPP", Cost Per Premises, as an indication of the Capital Expenditure needed to install a service to single premises.
They also publish two other figures, RFS, Ready For Service, a count of premises that could potentially connect to the NBN, and 'Activations', fee paying customers.
CPP excludes "Common Costs" like Software & IT systems and transit networks.
This is often taken as 20% of the total CapEx.

The CPP for FTTP Brownfields" is static as the rollout has terminated.
Meanwhile, the cheapest service NBN Co is installing is Full Fibre in new areas, "greenfields".
Even if you take off the $700 estimated lease payment to Telstra from the copper services, it's still competitive, and just like in New Zealand, getting cheaper every year.

How do CPP, RFS and Activations fit together to give a notional CapEx?
That's not published.
Why would the Government & NBN Co not be transparent about what they are doing with taxpayer money? It's incompetence at best, deliberate obfuscation at worst.

The figures from the 2018 Plan are extracted below in the table.
The MTM CapEx for Premises could be $30.15B or $24B,
or 'grossed up' with 20% Common Costs, $37.7B or $30.1B

There's a $15-$20 billion gap between the cost, as CapEx and Peak Funding.40% of the Budget is 'unexplained'.
Does this gap between "Cheapest" (Peak Funding) and "Least Cost" (CapEx) constitute a Minister misleading the public and parliament?

What is going on that this calculation, from public data, hasn't been done by either the Business Press or by the ALP?

3.2 The April 2014 Statement of Expectations
On 8 April 2014, NBN Co’s Shareholder Ministers issued a new Statement of Expectations (April 2014 Statement of Expectations) to NBN Co which replaces the Previous SoE and Interim SoE.

The April 2014 Statement of Expectations outlines the Government’s commitment to the NBN in delivering“very fast broadband as soon as possible, at affordable prices, and at least cost to taxpayers”.

To achieve this objective, the NBN should be built in a cost-effective way utilising the access technology (Access Technology) most appropriate in each area of Australia.

That is, the April 2014 Statement of Expectations provides NBN Co:
“With flexibility and discretion in operational, technology and network design decisions, within the constraints of a public equity capital limit of $29.5 billion specified in its funding agreement with the Commonwealth, and the Government’s broadband policy objectives.”

Other Comments There were, and still are, multiple fallacies and misdirects in Turnbull's NBN commentary in 2013 and since.

The real fiscal cost difference with Turnbull's discredited 2013 spreadsheet was $25-$50, dollars, not hundreds, thousands, millions or billions. Just $25-$50 dollars, and it was known by both major parties in 2013.

Not per person or per year, but out to 2040.

And per household, $1-$2 per year per household - not person or taxpayer, household.

Turnbull made all that fuss, then and since, over an absolutely trivial cost per taxpayer.

The Govt Equity investment in the NBN, by both ALP & LNP, is designed to make a profit.

How does making a profit equal "costs the taxpayers"?

Only if you make egregious & deliberately misleading statements.

And leave out that the ledgers of every business have two sides:

Expenses ('costs'), and

Revenues.

You will have hear many people & politicians talk about the "cost" of the NBN, slinging around many different and unbelievable figures.

None of those numbers, Capital Expenditure or Peak Funding, are a cost.

The "Ninety Billion Nightmare" scenario pushed by News Ltd was never possible, based on four Turnbull "what-if's", all happening together. As if the NBN management hadn't anticipated problems and put risk mitigation in place, or wouldn't react if the project wasn't going well.